In the 19th century the New Zealand economy suffered from deflation – prices for a wide range of goods and services kept dropping. The amount of money the government issued was tied to the amount of gold it held, and the only times prices rose were when substantial amounts of gold were found and more money was issued. Lack of spending money drove prices down.
20th century inflation
In the 20th century the government issued more money, and prices went up. Apart from the depression in the 1920s and 1930s inflation was constant. When the price of oil rose steeply in the 1970s it pushed up the price of transport, and inflation increased sharply.
Finance Minister Robert Muldoon tried to control inflation by freezing wages and prices from 1982 to 1984, but this led to confusion about what goods were really worth, and slowed economic growth.
In 1989 the government gave the Reserve Bank the task of controlling inflation, by varying the interest it charged banks, which had a direct influence on the rates banks then charged their customers. People with bank loans had less money to spend on other goods and services, and there was less opportunity for price increases.
The government also deregulated the labour market, and reduced taxes; the amount of money in pay packets went up more slowly and prices rose less.
Prices are measured by the consumer price index (CPI) which calculates the prices of some basic goods and services. Using the CPI, governments can tell how prices change over time. CPI records of New Zealand prices began in 1949.
When exporters are paid by overseas customers the money they receive has to be exchanged for New Zealand dollars. The amount of New Zealand dollars they get for foreign currencies varies according to the exchange rate, and this affects the price exporters get for their goods.
Until the 1980s the government fixed the value of the New Zealand dollar, usually at a set percentage of the British pound. But in 1984 the dollar was allowed to ‘float’ – its value was determined by how much it was worth in world markets. After 1993 the dollar rose steadily in value, but in 2008 it fell sharply. When the dollar is low exporters make more money, but people buying imported goods have to pay higher prices.
The effects of world markets on New Zealand prices for imports, and the prices New Zealand gets for its exports, are measured by a special index known as the terms of trade index. It helps people make direct comparisons between the two sets of prices.
Economists also measure the effects of the exchange rate on trade over time. This is called the trade weighted exchange rate index (TWI). Between 1974 and 1990 the TWI declined, then it climbed until 2008, then dropped sharply.